Global Warming: It Just Got Hotter for U.S. Companies

The Supreme Court today ruled that the Environmental Protection Agency needs to step up to regulate the carbon dioxide produced by automobiles. This historic decision creates an immediate risk for public companies, and not just those based in Detroit.

Add to this result some highly motivated and well-organized investors whose trillions of dollars in collective assets are being used to push for better disclosure of corporate carbon footprints, and it’s clear that “climate-change risk” is about to be a featured player on many balance sheets.

This is all actually good news for companies that play it smart: As with most new challenges, climate change presents an opportunity for first-movers to execute plans that distance them from the field. On the other hand, firms that play “wait-and-see” may see their reputations and stocks suffer.

In Monday’s decision in Commonwealth of Massachusetts vs. United States Environmental Protection Agency, the nation’s highest court dismissed the EPA’s position that Congress hadn’t meant for the regulator to oversee carbon emissions from cars because lawmakers didn’t specifically cite such pollutants when they crafted the federal Clean Air Act. (Disclosure: During my tenure as chief counsel for the EPA during the administration of President Clinton, I offered my opinion that in fact the regulator did have authority to oversee auto emissions; that opinion was cited in yesterday’s ruling.)

Chief Justice John Paul Stevens, in a decision for the 5-to-4 majority, wrote that “EPA’s identifies nothing suggesting that Congress meant to curtail EPA’s power to treat greenhouse gases as air pollutants.” Speaking to the need for the EPA to be proactive, Justice Stevens added, “EPA’s steadfast refusal to regulate greenhouse gas emissions presents a risk of harm to Massachusetts that is both ‘actual’ and ‘imminent.'”

So companies that produce any greenhouse emissions – or do substantial business with those that do – should expect more scrutiny. Other cases are being rushed to court to further test climate-change theories, and look for other potential litigants to be invigorated by Massachusetts vs. EPA.

The other factor pushing the greenhouse debate out of the realm of the theoretical for companies is increased investor focus and sophistication around climate-risk issues.

Climate concerns are no longer solely the purview of a small group of “socially responsible” funds. The Carbon Disclosure Project, a coalition of institutional investors with $31 trillion under management, has pushed-hard-for the world’s largest companies to disclose information on their greenhouse gas footprints. More recently, others large institutional investors have demanded that their portfolio companies not only disclose information about polluting emissions but also provide rigorous analysis of the risks to their businesses from carbon regulation.It doesn’t take much imagination to see a future in which shareholder litigation focuses squarely on the quality of such disclosure and how it affects investment performance.

Climate risk is already affecting one of Wall Street’s most lucrative pastimes: M&A. The leveraged buyout of utility TXU was held up in no small part by investors who wanted to be assured environmental concerns around the deal were being addressed.

It’s possible that the Supreme Court ruling will spur further action in Washington, but the likely outcome there is no more attractive for corporate leaders who don’t have a good grip on the climate risks of their businesses: A Democratic Congress would likely welcome the opportunity to engage on the matter and presumably would push for further greenhouse gas oversight.

The risks to U.S. businesses don’t end at the nation’s borders, either. Consider: China is expected to soon lead the world in greenhouse gas emissions, a factor that could affect the many U.S. firms now sourcing from that country. With no complete climate solution on the horizon, companies should start preparing for the regulatory and other changes almost certainly coming their way. That means developing new tools to measure climate-change risks and incorporating those findings into strategic planning. Some may even find new opportunities to enter new markets, such as carbon-emission trading. Of course, increasing energy efficiency also is a good idea.

Bringing to bear the most sophisticated and broadest-based thinking on these issues will continue to be critical for corporate America – and for everyone else, too.

Gary S. Guzy, general counsel of the U.S. Environmental Protection Agency from 1998 to 2001, is the national practice leader for emerging environmental risk at Marsh USA.